Tesla (NASDAQ:TSLA) reported 1Q earnings, and Elon Musk had but one request from the U.S. government: End the tax credit subsidies for electric cars.

I say the U.S. Congress and President Trump should grant him his wish.

After all the U.S. Congress and the Administration are searching with a flashlight for loopholes that can be closed so that the general tax rates - income, capital gains, corporate, etc. - can be lowered. The administration is on a good track by proposing that the State and Federal tax deductions, among others, be abolished.

However, more closing of loopholes is needed so as to keep the budget deficit from ballooning as rates are lowered.

Well, how about the one in which regular people in middle America are forced to subsidize billionaires and hippies in San Francisco buying $100,000 muscle cars? If there ever were a closing of a loophole that would fit Trump and the Republican Congressional majority like a glove, it's got to be this one.

Listening to the Tesla May 3, 2017, quarterly financial results conference call, Elon Musk is practically begging to be relieved of this tax subsidy. From the 1Q 2017 transcript here:

"And in fact the incentives give us a relative disadvantage. Tesla has succeeded in spite of the incentives not because of them." - Elon Musk, May 3, 2017

For the full context about those sentences, here's what Elon said that led up to his conclusion:

"Elon Reeve Musk - Tesla Motors, Inc.

Yeah, absolutely. And I should perhaps touch again on this whole notion of - it's almost like over the years there's been all these sort of irritating articles like Tesla survives because of government subsidies and tax credits. It drives me crazy. Here's what those fools don't realize. If Tesla is not alone in the car industry, but all those things would be material if we were the only car company in existence. We are not. There are many car companies. What matters is whether we have a relative advantage in the market." - Elon Musk, May 3, 2017

Musk's argument is that the tax subsidies are worth more to Tesla's competitors than to Tesla, and that therefore Tesla would better off without them, relatively speaking. Musk has made this argument in previous forums before, including on a previous earnings call as I recall, in the context of California's ZEV (zero emissions vehicle) credits, which Tesla is able to sell to other automakers as a purely politically engineered 100% gross margin profit. He made the argument on the 1Q 2017 earnings call again. In that ZEV case, his argument is that Tesla sells these $5,000-a-pop credits to other automakers at a discount, whereas those automakers make and consume some of those $5,000-a-pop credits internally without applying such as discount.

"So Tesla's competitive advantage improves as the incentives go away. This continues to be something that is not well understood." - Elon Musk, May 3, 2017

OK, the U.S. Congress should grant him his wish: Abolish the incentives for Tesla then. Get rid of the $7,500 per car subsidy. Same for California's ZEV regime.

Would Ford (NYSE:F), General Motors (NYSE:GM) and Fiat Chrysler (NYSE:FCAU) - among all the other automakers - shed a tear if they too saw their electric car subsidies go away? Perhaps, but who cares? They will get the benefit of a lower corporate income tax rate, which should be far more material to them than the electric car tax credit that their customers use to buy a tiny quantity of loss-making electric cars.

Besides, if Tesla is begging Washington, DC to abolish the tax credit, of course it should be abolished for all automakers, not just Tesla. That really should be obvious and is not in question.

Elon Musk apparently looks forward to competing in a subsidy-free world (who knew?). But what about the other automakers? Wouldn't lower subsidies for electric cars mean fewer electric cars sold for them?

It sure would. And the other automakers would love it too!

Why? Because under the current regime, they are manipulated by both the U.S. Federal tax code, as well as by California's ZEV mandate, to develop and produce more electric cars than for which there is true natural free-market demand.

And that means billions of dollars in investment for products that they eventually have to dump at negative margins.

If you have been following the news over the last month or so, you will have seen that many or most of the automakers are under tremendous pressure, at least in the U.S. market right now (here). Sales are down. All other things equal, these sales declines lead to profit reductions - and God forbid, eventually losses - including plant closures and production halts along the way.

It may not be the chief culprit, but surely losing money on being pushed to sell loss-making electric cars is not helpful to maintain employment in the U.S. car industry. Are plant closures and lower tax revenue resulting from lower profits what President Trump and the U.S. Congress want? I think not.

Well, this malinvestment into loss-making electric cars is one factor that will cause such plant closures and lower tax revenue resulting from lower profits.

In other words, by abolishing the electric car subsidies, the U.S. Congress and the Federal Administration would accomplish several goals simultaneously:

Give Elon Musk what he is begging for: An end to the subsidies.

Plug a loophole in the Federal budget, enabling a lowering of general tax rates instead.

Stop luring the other automakers into making cars that too few people want.

Improve profitability among most automakers, so that they can keep plants open, keep prices of regular cars low, and avoid laying people off.

Ending the Federal electric car subsidies would be a huge step in the right direction to curing this costly malinvestment, but it would not be enough to fully lift the burden from the backs of the automakers. I mentioned the ZEV credits above. They are led by California, although a few other states have joined in this scheme.

The ZEV mandate prescribes that automakers sell an increasing share of electric (or hydrogen) cars in California, eventually reaching 15.4% of total sales in 2025.

Now, if the prescribed Sacramento Politburo percentage is larger than the free-market demand, then these cars have to be sold at a loss. This is a huge deadweight loss on the automakers, and it is borne by everyone who doesn't buy an electric car - including mostly the people living "outside" the ZEV states, i.e. in Red State America. Why? Because the price of a car is set to be the same inside the ZEV states (California et al) as it is in most U.S. states.

So for the current U.S. Congress and the Trump Administration, granting Elon Musk's wish and canning the Federal electric car subsidies is only half the battle. The other half would be to ensure that California ends its costly ZEV mandate as well. And if the Feds don't induce California to end this practice, the automakers will be forced to take action on their own: here.

About those Model 3 deposits

Leaving aside the fact that Tesla's customer deposits were down $47 million in the March quarter, the Federal tax credit is a far bigger issue to begin with as far as Tesla's Model 3 deposits go. It's basically a speculative bubble, or a "big fat bubble" as President Trump would say: here.

Let me explain via an analogy.

Let's say that Steve Wynn or Sheldon Adelson invite you to one of their casinos. All you need is a $1,000 deposit - fully refundable - and you get a chance to win $7,500 if you are one of the first contestants. You don't really know how many of these prizes will be available, but seeing as the $1,000 deposit is fully refundable, you don't really have anything to lose. The $1,000 refundable deposit is effectively a free option on scoring $7,500 from the U.S. Treasury.

Well, that's the Model 3 deposit scheme for you.

You put down a refundable $1,000 deposit on a Tesla Model 3. And you can do this for multiple cars. For each deposit, you have a shot at getting this $7,500 Federal tax credit.

So let's say you - perhaps you're even a Tesla employee - put yourself down for two such $1,000 deposits. You are now slated to collect $15,000 from your fellow taxpayers - perhaps a couple of swing voters in Wisconsin or Michigan who drive gasoline cars to work - if you get your car delivered before this subsidy scheme has expired.

Why doesn't every company entice the illusion of unlimited demand using a similar "totally refundable" deposit scheme?

This also explains why Tesla refused on the conference call to say where it stands in relation to hitting the 200,000 mark that triggers the unlimited-in-quantity phase-out period. From the transcript:

Jeffrey Osborne - Cowen & Co. LLC

Is there a way you could just give us what the cumulative numbers thus far in the U.S. quarter to date - sorry, inception to date?

Elon Reeve Musk - Tesla Motors, Inc.

No. Here's the problem, if we do that, then people run off and make all sorts of conclusions based on that that are not predictive of the future, because you can't test drive Model 3. If you come into our stores and you want to buy a Model 3, you could buy a Model S or Model X instead. We anti-sell the Model 3. But our net reservations continue to climb week after week. No advertising, anti-selling, nothing to test drive, still grows every week.

Reservations grow every week? According to Tesla's balance sheet, customer reservations were $664 million on December 31, 2016, but only $616 million on March 31, 2017.

When the $7,500 tax credit ends, it's all over

Once prospective customers think that they may not get their car in time for the $7,500 tax credit, it's time to ask for their $1,000 deposit refund. And then the whole Tesla house of cards collapses.

That brings us back to the U.S. Congress and the Federal administration. The oft-cited number for these $7,500 electric car tax credits is 200,000 units sold in the U.S. Well, that's actually not the number, you see. 200,000 is when the clock starts ticking for the subsidy to fade out, but that could be six quarters after that point, a year-a-half.

And during this time after the 200,000 number is hit, there is no limit on the number of such tax credits that are available to milk the Federal Treasury. It is basically an unlimited exposure to the Federal budget. If Tesla sells 500,000 cars - which it says is its near-term aim - during the period when the $7,500 tax credit is applicable, all 500,000 cars would theoretically be eligible. That's a Federal liability of up to $3.75 billion right there just for one company. Then add up all the other automakers and we are looking at a liability to the Federal budget that starts to rival the entire cost of World War II. Talk about a massive subsidy away from regular America right into the pockets of rich Californians who may have voted as much as 90% against Trump in certain ZIP codes. This isn't only the costliest of subsidies, it's also the one most skewed away from moderate-income Red State Americans to rich Blue State elitists living primarily in California's toniest coastal ZIP codes and around New York City.

You would think that this would be the single easiest and most obvious loophole that the U.S. Congress and The Trump Administration could plug in order to reduce the budget deficit.

And yes, I know: During the roll-off period, the full $7,500 credit is only available for a limited period of time, after which it gets cut in half, and so forth. But the point is this: During the time that it "is" available, the quantity is unlimited.

How precisely would they plug this loophole? Easy: Just limit the Federal tax credit to 200,000 units, period. No extra time or quantity. When you hit 200,000 units, you're done. That's one option, but perhaps it's too generous.

Why 200,000? Because no automaker has hit that number yet. That makes it fair, someone might argue. Actually, it would be better if the subsidy scheme was simply abolished immediately without any further delay or expense even if it would be "unfair" to some automakers such as Jaguar Land Rover (NYSE:TTM) whose customers have not yet utilized any of these credits.

An alternative compromise would be to set the number somewhere between zero and a hard 200,000 limit, capping the exposure for some automakers while allowing some to benefit from it, at least to some degree. Only a few automakers have hit (or are around) the 100,000 mark now anyways: Tesla, General Motors and Nissan (OTCPK:NSANY), to mention the biggest plug-in car sellers in the U.S. market.

So perhaps set the number at 100,000 or 150,000. That may stop Tesla, GM or Nissan immediately, but allow other auto brand customers to continue to drain the Federal coffers for a few years, catching up with Tesla, GM and Nissan.

Either way, at an absolute minimum, the U.S. Congress and the Federal Administration must put an immediate stop to the budget exposure beyond the first 200,000 units. That would be the "minimum" they should do. The best option would be immediate abolition of the whole thing, lock, stock, and barrel.

Meanwhile, while I don't know all of what Elon Musk has been telling President Trump in their multiple famed meetings of recent, perhaps the president's staff can print out Musk's comments and check whether a similar request to end electric car subsidies was made to the president in person. House Speaker Paul Ryan's office may want to do the same, as well as House Ways and Means Chairman Kevin Brady.

Conclusion: Grant Elon Musk his wish

The Tesla Q1 earnings call made it clear: The person (and company) most associated with electric car subsidies says they're to his (relative) disadvantage. U.S. Congress and President Trump should be able to take this suggestion and save the U.S. Treasury billions of dollars in closing the potentially largest and most unfair uncapped loophole in the U.S. Federal budget.

Disclosure:I am/we are long GM, F.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of submitting this article for publication, the author was long GM and F. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted my most major automakers.